American International Group, Inc. (AIG) Earnings Call Transcript & Summary

All right. Good afternoon. I'm Erik Bass, U.S. life insurance analyst for Autonomous Research. I'm excited to have AIG joining us at the conference this year. The company has undergone an impressive turnaround and transformation over the past few years, and I'd like to welcome Peter Zaffino, who joined AIG in 2017 and became CEO in March of this year. Peter will kick off with a few opening comments, and then we'll move into Q&A. If you'd like to ask a question, please click on the Live Q&A Feed box in the upper-right corner of your screen. With that, Peter, thank you for joining us, and let me turn it over to you.

Erik, thank you for having me and look forward to being together this afternoon. Good afternoon, everyone, and thank you for inviting me to participate in this conference. I thought I would provide a few opening remarks, and then we can turn to questions. I think everyone here knows I joined AIG in the second half of 2017. Since that time, we've been very focused on several key priorities: underwriting excellence, operational excellence, investing in world-class talent, fixing the core of AIG, reducing volatility and achieving more predictable outcomes across our businesses. Our first quarter 2021 financial results, which we issued a few weeks ago, reflect the tremendous progress that we've made. As we noted on our earnings call, we had an excellent start to the year and have significant momentum across the entire company. General Insurance delivered outstanding results, especially in our commercial business and our international business, in particular. We remain on track to deliver a sub-90% combined ratio, excluding CAT, by the end of 2022. Life/Retirement delivered another solid quarter despite a persistent low interest rate environment, and our investments unit also delivered very good results. Looking back over the last few years, 2020, in particular, was an important inflection point for AIG. We managed through COVID exceptionally well with our global colleagues showing resilience and incredible commitment to each other, our clients, distribution partners and other stakeholders. The General Insurance portfolio improved significantly. And coming into 2021, we pivoted from remediation to growth. We also announced our intention to separate Life/Retirement business from AIG, and we made significant progress on AIG 200, our enterprise-wide transformation program, where we're investing in core processes and infrastructure. We did this in a remote work environment, and we even accelerated some of our AIG 200 programs. On the capital management side, our liquidity, capital and balance sheet all remain very strong and expect to complete our previously announced $500 million stock buyback by the end of the second quarter. Lastly, we continue to work hard on a minority IPO of Life/Retirement and are making good progress on this important strategic initiative. Overall, I'm pleased with where we are as a company, and I'm confident about AIG's future. So I think with that, Erik, I'm going to turn it over to you to questions.

Perfect. That's a great overview. And maybe we'll start a little bit from the beginning and the journey that you've been on over the past couple of years. So maybe stepping back in time a little bit, what attracted you to AIG in 2017? And can you talk about your observations early on? What did you identify as kind of the biggest issues at AIG that needed to be addressed? And how did you go about fixing them?

Well, I think everyone knows I joined from Marsh & McLennan, where I had a terrific job with a terrific company. I've been there for 16 years. I mean I have been approached over time to pursue other public companies as a CEO. None of them were particularly appealing, just based on what was being asked. And so when I looked at the AIG opportunity, one, is it's an iconic brand. I think it had a leadership position at one point in the marketplace. And I was excited for a new challenge. Little did I know how big the challenge was. I mean I had a pretty good understanding but obviously not fully aware. I think people don't remember, I didn't come in to run General Insurance. I came in to be the Global Chief Operating Officer, run the global field operations for all of AIG. But within 60 days of doing extensive business reviews, getting a clear picture of what was going on with the company, I realized we had some real foundational problems. So that's when I shifted into running our General Insurance business in order to reposition in the marketplace. But I thought that AIG would be a terrific opportunity to apply sort of the skills I had in terms of turnarounds and repositioning it as an industry leader.

Perfect. And then maybe digging into that a little bit more, after you had spent some time at the company and probably when you transitioned to that General Insurance role, maybe what were the biggest surprises you uncovered? And were there places you had to pivot your strategy or kind of change your approach?

Well, as the -- again, the CEO of Marsh and running risk and insurance services, I had a pretty good seat in terms of what was happening at AIG. So I didn't walk in thinking that the underwriting strategy was particularly strong or the relevance in the market. But I do have to say some of the biggest surprises were just the talent. And I don't know if it's a talent drainage. I don't think the talent was there in terms of what was being asked. The strategy of this large limit was heavily flawed, became very commoditized. Underwriting capabilities, no culture of underwriting excellence. And so when we looked at deployment of limits and taking significant risk across the portfolio and not having any really reinsurance strategy was something that was very troubling. And it lacked operational capabilities, which on the end-to-end is really important in underwriting in terms of data capture. And quite frankly, with the amount of scientists that existed within AIG in its past, I was expecting much more insight on data. That was the one area where I was expecting -- I knew that the underwriting wasn't strong. The strategy was flawed, no reinsurance. Some of that stuff is fixable. But like the data and the data architecture, I was expecting to be significant, and it just didn't exist in terms of being helpful. So that is why we -- once we got the underwriting turnaround moving, we also had to get AIG 200 going because we needed to have an end-to-end process with capabilities of extracting data, making really good decisions on the foundation.

Got it. Just given that as the backdrop, when was the point that you kind of knew you were on the right track and that the General Insurance business had reached an inflection point?

Well, it's not a particular -- like I wouldn't go to a specific month or a quarter. I think the foundational work that was being done was all about positioning the company to actually thrive in the future. One of the things that -- I'm proud of many things at AIG and our colleagues, but one of the best is the team we've been able to assemble. Early on, Tom Bolt, coming in to design with me a lot of the underwriting criteria and how we're actually going to assess risk; and Charlie Fry, who is an expert at reinsurance and having him come onboard; followed by Dave McElroy; Mark Lyons; Chris Schaper, I mean, we -- I could not get better people in the industry, if you gave me any draft picks at all. I think we've assembled a tremendous team/; so that team coming together and assessing the problems in terms of what we needed to do, I felt very good about the baseline in terms of how we were decreasing some of the risk. I mean as in last earnings call, and I almost wanted to pause because it's such a monumental number, but we have reduced over $650 billion of aggregate in the company. I mean I don't know how many companies that creates, but we've reduced risk in the portfolio significantly since we started this. And that can't go unnoticed. I think the other piece is the biggest validation is from reinsurers. They're in the business. They get it. They have a perch to look at every ceding company in the world. And when we were starting to do renewals and had more participation, more companies wanting to trade across multiple lines of business and multiple geographies, we felt very fortunate to have those relationships. But they entered by trusting the team that was here, knowing the portfolio was going to be challenged. And then they continue to commit themselves as wanting to be strategic partners based on the underwriting that we were doing in the company. So that was a real, big validation as we got to some of our big renewals and saw more reinsurers coming in, bigger lines being taken and the willingness to trade across multiple relationships. So I think that was, for us, a big piece. And then you start to see the traction that we're getting in the marketplace in terms of underwriting quality, leadership characteristics. I talk about ventilation, and I think that sometimes is not fully understood. But AIG not only took these massive limits, but they did them in lead layers. And so taking the portfolio and spreading it out and getting away from first losses meant a lot. So like when we were ventilating we were just taking our lead capacity and taking some of that and putting it in mid-excess and high excess. And when you do that, you just get better balance. And some of the high excess becomes commodity, but not if you're doing the lead pricing, because they want to make sure that they have that capacity. So as we start to remediate, start to get acceptance in the marketplace and having come from the broker side, brokers are greedy. Brokers ask for a lot of different things, as they should, and I would have done when I was there. But the one thing they want the most is consistency because they have to also recommend insurance companies to their clients. And so one of the things we tried to do is not only reunderwrite the portfolio and start to get a better balance, but we need to have that consistency so we will continue to get recommended. And the renewal retention reflects that. Our new business now reflects that and think that we have a lot of tailwinds as a result of the work that we've done.

Great. Now if we move to the other big strategic focus, which you hinted out in your opening remarks and said last fall, you announced the plans to separate the Life and Retirement business from AIG, which is something that some investors, I think, have been advocating for, for several years now. But why do you believe this is the right strategy going forward? And why is now the right time to pursue this?

Well, a lot of what we've outlined in the past remains the same. I mean we took a comprehensive review of the composite structure, and we concluded that separation was the right path to create value for our stakeholders and also position both businesses to succeed in the markets they compete in. There's very little overlap in terms of distribution. There's no overlap in product. So I think having independence is going to allow us to apportion capital to strategically move those organizations forward. The other piece, too, is General Insurance really couldn't stand on its own until recently because of the profitability, volatility and lack of track record. So I think getting a strength in General Insurance and having that foundation with material reduced risk and volatility and positioning it for profitable growth in the future was very meaningful. I think we've had effective management of the diversification benefits. We said no additional equity capital will be needed in subsidiary, so I think that was also another major fact. We talk a lot about the DTA. But the foreign tax credits, which are part of the DTA, need income like -- they need income from the life company. And so we think we would consume a lot of that by the time we would actually get to a majority sale. And so like doing the minority IPO or minority at the time, if we were to look at a private sale, we would be able to preserve a lot of those foreign tax credits. So that was less of an obstacle and just making sure we had no surprises within the Life/Retirement and Property and Casualty businesses. And then last, I think investors like both sectors, but sometimes they like to choose. I mean they don't necessarily want to choose a composite. They may want to choose one life company, one property and casualty. So I don't think we were getting all the interest that perhaps we would as separate entities. And also, as we reposition General Insurance, we think we're going to be an industry leader across the globe. And so we want to make sure that, that business is less complicated, and the story is a little crisper. So those are some of the reasons why we decided to pursue it. But we did a lot of work on it, and that was not a -- in October, it's like we should do this. We've been working on it for quite some time.

Got it. And you've now determined that an IPO of the 19.9% stake in Life and Retirement is your preferred approach. Why do you believe that's the best path to maximize value?

Well, we always thought it was the base case, and we outlined it as the path we were likely to take. And We said that we would entertain any private approaches, and they were very good companies and quality views in terms of what we should be doing with the 19.9%. But we wanted to make certain that no matter what we did, we preserve the value on the 80.1% as well. So we did not want to mortgage the future by doing something that might have a very positive headline price but would have us doing things that would compromise value in the future. And so I think we felt -- we reviewed alternatives that were in front of us and decided that at the point in time when we went through earnings that the preferred approach would be the base case, which was the IPO of the 19.9%.

Got it. And can you walk us through the time frame for the separation? And realizing it's not all in your control, but what are the next steps in the process?

Well, we outlined some of this on the earnings call. I mean we're working hard towards getting the S-1 filed and getting the IPO launched. The 2 big ones that we had to work on as components of that were getting our standalone financial statements for Life/Retirement completed, and so we've made enormous progress there and then getting third-party actuarial reviews to complete and validate the work that's been done within AIG. So that -- we made enormous progress there. We've built a separation management office as well simultaneously. So it's like AIG 200 in terms of having a transformation office, but -- so we'll have work streams and actually how we separate Life/Retirement from AIG with the minimal amount of disruption. So we've been working through that, and that is going to be a critical part of making sure that we can execute on the 19.9% and then subsequent dispositions after that, so like working towards the fourth quarter in terms of timing. But as you said, there's things out of our control like the regulatory approvals. And the market, we're not looking to time the market, but there's always things that come up in terms of timing that could make it slip into the first quarter. But we are working with a sense of urgency to make sure that we have all the details fleshed out and that we have a bunch of different work streams that are pulling up all the floorboards to make sure we're positioning this business to be highly attractive, and I think the market will respond accordingly.

And maybe building off of that last point, what do you think for the Life and Retirement business differentiates AIG in the marketplace? And why do you think it's well positioned to be a successful, independent public company?

It's got size and scale, well-diversified portfolio. It's been a very consistent performer. Its platform and distribution network are a key differentiator in our view, and the business has leading market positions across the board. So I think the position of AIG's Life/Retirement business will be very attractive. Also with Fortitude, which we've talked a lot about, is that we've limited net exposure to legacy blocks of business and therefore have addressed some of the more complicated issues as we are getting ready to do the 19.9%.

Great. Now maybe we'll pivot over to General Insurance, which will obviously be the base of AIG going forward. Maybe before getting into some of the specifics for the business, can you talk a little bit about how you're thinking about market conditions overall and the sustainability of the current hard market? Maybe what lines or geographies still need additional rate? And where are you seeing pricing momentum slowing?

Well, we've been in this market of rate improvement above loss cost for -- I guess we're entering year 3. It depends on how you look at it. I think the market that we're in now is the market we're going to be in for a while, and there's anecdotes. I mean if you think about it, if I go right to the reinsurance market where deals were oversubscribed on capacity layers within Florida for CAT, that's an indicator. But I don't believe that incumbents were impacted, and I think that the new capacity is going to be challenged in terms of their relevance in the marketplace as clients make choices and look at quality and consistency and ability to trade across multiple lines of business and multiple geographies. When we look at the current market, certainly, there's balance. And so I don't believe in prior markets. You can pick a time and place that the rate increases or the condition of the global market was as balanced as it is now. I mean, for instance, when we reported our first quarter, it's like getting rate increases in our international business on commercial being very commensurate to what's happening in North America. That typically doesn't happen. So I would say the balance has been in many geographies, many product lines. Areas where we're getting very meaningful rate increases have been driven by lines of business that need it. I mean some of the financial lines, casualty, property, making sure that we are focused on getting the right rate on a risk-adjusted basis, which means understanding the risk components of how we underwrite. So we've been very thoughtful on that. And I get the question often is like, "Will rates slow down?" I'm like what are we trying to answer is that are you going to get more margin this year in terms of getting rate above loss cost than you did last year? The answer is yes. If you're looking at absolute rate, I'm not saying I won't get it, but I think like looking at absolute rate and declaring victory on having the highest rates sustainable in every quarter, you better watch your portfolio because that starts to shift, too. We want to make sure that we're getting the appropriate risk-adjusted rates for a portfolio that we like on an underwriting basis, tightening up terms and conditions and making sure we're deploying capital in areas where we think those risk-adjusted returns are the strongest. And that's what we've been doing in 2021 and we'll continue to do in 2022. So we like the market. We think the market is very balanced. I think our leadership position in the overall market is highly valued. Our underwriting consistency across the globe is very strong and expect us to see real opportunities for growth in the short and medium term.

Perfect. And maybe picking up on that point, I mean, AIG put up impressive growth, particularly in Commercial Lines in the first quarter. And it sounds like you expect this momentum to continue. So what gives you confidence that now is the time to start stepping on the gas a bit from a growth perspective?

Well, Mark Lyons gave a little bit of guidance that we would see growth in our Personal Insurance business in the second quarter that's different than some of the prior quarters, and then we can go into that, if you would like. But the reason I have confidence is because I think the underwriting that we've done passes with the portfolio that we like. I think the brokers have been great partners for us and are looking to find ways to grow with AIG. I don't -- this is an infomercial, but the time -- number of times I've heard that the industry wants a strong AIG, and they really like the path we're on and want to collaborate with that and be a partner has been tremendous. We owe a lot to our brokers and clients in terms of giving -- while this management team didn't have anything to do with the past, I mean, giving us another shot to recalibrate underwriting standards and to be relevant to them. So I think that's been very well received. I think that we have expertise in multiple lines of business in multiple geographies. I mean if you think -- you pick the U.K. as an example, when you look at global specialties, no one has the capability that we have, the reaching network that we have across the globe, the ability and strong presence that we have in London and also having a syndicate that we can use stamp capacity to balance the portfolio. So we see it from a variety of different angles. And then our strength in terms of how we are repositioning the North America business, we see lots of opportunities for growth. But it will be growth that we think drives profit and drives margin and is focused on consistency and improving the combined ratio.

Great. Another topic we're starting to hear a bit more about is inflation. So can you talk about what you expect in terms of loss cost trend across different products? Are there any areas of particular concern?

I think we've done a very good job of looking at our portfolio optimization work in terms of going by line of business, by geography, access at all different stratifications and making sure that we have taken a very conservative position in terms of how we're building in loss cost in the accident year. So we work very closely with the underwriters with claims, actuarial. Actually, Mark Lyons leads the portfolio optimization work. And so together with making sure that we understand the marketplace that we're in and that not getting a false positive on some of the rate increases but make sure that we're building margin in the book is really how we apportion capital and we look to grow. So we are watching it, Erik, very carefully. It's not something that is going to be looked at the beginning of the year and not get updates throughout the year. We will make sure that as we learn what's either happening post COVID, there's going to be some trends that start to emerge, that we're on top of it. It can anticipate the future and as best we can. But also, our reinsurance strategy is one that is not there to drive results, other than to protect volatility and making sure that we don't have the pendulum swinging in terms of now we can take significantly more net because we feel really comfortable with the portfolio. We want to make sure that we maintain that risk appetite and deploy capital very carefully and then watch loss cost inflation and lines of business that would concern us with a great amount of scrutiny.

Perfect. And you mentioned reinsurance. We have a question coming in from the audience on that topic. It probably makes sense to go there now. I mean one area you've made significant changes over the past few years is your usage of reinsurance. So can you talk about your philosophy around reinsurance more generally and how you see the program continuing to evolve going forward?